Good morning and welcome to Bel Fuse's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please proceed. Thank you, Latonia, and good morning everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under Federal Securities Laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2023. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties, and other factors. These material risks are summarized in the press release that we've issued after market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website. Joining me on the call today is Dan Bernstein, President and CEO; Farouq Tuweiq, CFO; and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan. Dan?

Yes, thank you, Jean, and thank you for joining us on our call today. We are pleased with our results for the quarter. We continue to execute on our plan for growth and strategic improvement of profitability. As discussed over the past several quarters, the team has taken a multipronged and balanced approach to the way we do business in terms of customers we serve, products we sell and markets we support, doing it all in the most cost-efficient manner. Our third quarter sales continued to be healthy, driven by the order patterns of our customers whereby we saw different growth profiles across our diverse product offerings. We saw growth in certain markets such as defense, aerospace, eMobility, and rail that was offset in general industrial premises by our consumer. On the distribution side of business, we see some pockets of growth. However, the distribution channel continues to have elevated levels of inventory that affected our new orders. As we looked at our top line trend, it's important to remember that we are an engineering-driven company first. We've been successful in supporting tomorrow's technology for over 70 years, and this is a testament to our ability to work closely with our customers and engineers. In developing the future products, there is a value associated with that. A few years ago, we were eager to support all customers at all costs, allowing us to engage in projects we felt were a worthwhile pursuit, but which at times were less than great outcomes for us. To be clear, our priority and focus are to be aligned with customers who value the quality and technology of our products and are not solely focused on price. We no longer have a problem walking away from these sales that fall below our gross margin requirements. It allows our engineers to work on more beautiful designs and create open space in the factory floor to support our growing end markets such as eMobility, medical, industrial, and rail. Our internal model in 2023 is about building better value, and this touches all areas of our business: HR, finance, product development, business development, procurement, and manufacturing. There isn't a single function or department within the organization that doesn't have improvement initiatives taking place. Our collective actions have evolved and improved profitability and increased cash generation. This gives us financial flexibility to continue to explore various growth and capital adaptation strategies, which could include a potential stock buyback, subject to market conditions, evaluation of acquisitions, and other strategic initiatives to support the future growth of the company. As we approach our 75th anniversary on January 11, 2024, it is exciting to see the recent mindset and cultural shifts that have taken place internally, and the level of energy and dedication put forth by our global team as we deliver better value to our customers, shareholders, and associates. That said, I'd now like to turn the call over to Lynn to provide a financial update.

Thank you, Dan. From a financial perspective, sales were fairly stable for our Connectivity and Power segments as compared to the third quarter of 2022, with the largest impact felt within our Magnetic segment. While the Magnetic segment was down from Q3, 2022, we did see an almost 20% rebound from its low point in Q2 2023. Overall, third quarter 2023 sales were $159 million as compared to $178 million in the third quarter of 2022. Of the $19 million decline, $8.4 million was attributable to reduced expedite fee revenue in the 2023 quarter versus Q3, 2022. Gross margin continued to increase on a year-over-year basis for eight consecutive quarters and reached 35% in the third quarter of 2023 as compared to 29% in last year's third quarter. Margin improvement continued and was led by favorable product mix and the successful execution of a variety of cost reduction and efficiency programs. By product group, Power Solutions and Protection sales for Q3 2023 were $74.9 million, down 2.1% from last year's third quarter. Within the Power group, an $8 million decline in expedite fee revenue was largely offset by higher demand for our front-end power products serving our networking end market. Sales of our eMobility products also remained strong and helped offset declines in Circuit Protection and distribution sales. Gross margin for our Power Group was 41.7% for the third quarter, a 930 basis point improvement from Q3 2022, primarily driven by a favorable shift in product mix, cost reduction efforts, and favorable FX. Our Connectivity Solutions group had sales of $51.8 million in the third quarter of 2023, an increase of 3% from last year's third quarter, with continued strength seen in defense and aerospace. Gross margin for this group came in at 35.8% for the third quarter of 2023, up from 26.1% in the third quarter of 2022. Lastly, our Magnetic Solutions group had Q3 sales of $32 million, down 37.2% from last year's third quarter. Gross margin for this group was 22% in the third quarter of 2023 as compared to 30.4% during last year's third quarter. We are happy to report that $6.9 million shipped from the new BTX site in China during the third quarter of 2023. At the consolidated level, our backlog of orders totaled $408 million at September 30. Historically, our backlog typically represented approximately one quarter's worth of sales when we times for 8 to 12 weeks. Our current backlog levels continue to represent about 2.5 quarters worth of sales, and we view this as still being high. We expect our level of backlog to come down further in future quarters as lead times continue to normalize. Our consolidated book-to-bill ratio improved sequentially from 0.6 in Q2, 2023 to 0.8 for Q3, 2023. Of note, our Q3 bookings within our commercial air end market were $15.7 million, a new quarterly record high for us in this end market. Our selling, general, and administrative expenses for the third quarter of 2023 were $23.7 million or 14.9% of sales, up from $22.2 million or 12.5% of sales in the third quarter of last year. This increase was largely related to higher salaries and fringe benefits in the 2023 quarter, partially offset by lower sales commissions. Turning to the balance sheet and cash flow item, we ended the quarter with a cash balance of $100.2 million as compared to $70.3 million at year-end. We generated $81.4 million in cash flow from operating activities during the first nine months of 2023. With capital expenditures of $9.7 million, this resulted in free cash flow generation of $71.7 million for the first nine months of 2023, an improvement of $53.3 million versus the same period of 2022. Our inventory levels decreased by $29.3 million from year-end, resulting in improved inventory turns of 2.9 times during Q3, 2023, at 2.6 times from year-end. While progress has been made on bringing inventory levels down, which remains a company-wide initiative to restore our inventory turns to better align with industry norms. Looking at the third quarter of 2023, we generated $40.8 million in cash flow from operating activities. This translated into free cash flow of $38.2 million during the third quarter. From a debt perspective, our outstanding balance remains at $60 million and is effectively subject to a fixed interest rate of 2.5% through our swap agreements that are in place through 2026. I'll now turn the call over to Farouq for additional commentary.

Thank you, Lynn. Over the past months, I've spent quite a bit of time visiting Bel facilities in Europe and in the Dominican Republic, and what a big change I've seen from just one year ago. As I look at the mindset shift that has resulted in improved productivity and cost containment at the factory level, it has been nothing short of stellar. We continue, though, to challenge our facilities to improve globally and expect big things from there. We also have been devoting a good amount of time on our material spend to ensure we are aligned with vendors appropriately matched for our size, which we believe will ultimately result in a higher level of savings. Dan and I also attended our European sales meeting a few weeks back and believe it's in great hands as Charles is passed forward to further penetrate Europe. On a side note, Europe has been a strong performer for us this year despite some of the challenges there, and we think there is more to be done in this region. Looking out to the fourth quarter, based on currently available information, we provided sales guidance in the range of $146 million to $154 million, with gross margins roughly in line with Q3, 2023 levels. In addition to some voluntary trimming on the top line, as Dan mentioned, the channel continues to be over-inventoried, especially with our distributor customers. We expect this situation will continue for another two quarters or so before it returns to normalcy, though there are certain pockets of growth in the channel, which is good to see. From a supply chain perspective, there has been easing and availability of passive components, but we are still seeing longer lead times for others, mainly on the IC side. In summary, it's been a busy year on all fronts, with progress made in many areas of the organization. I'll reiterate my sentiment from prior quarters: we are on this journey of continuous growth and improvements. Change is rarely linear or immediate. We do know we are building a healthier organization that's more focused on the pursuit of growth and demanding operational excellence. These are all things that excite all of us. With that, I'll turn the call back over to Dan.

And I thank you, Farouq, and at this time, I'd like to open up the call to any questions you might ask.

Thank you and congratulations on the good quarter. Lynn, I know you said at the Jeffries conference that your debt is as low as it's going to get. But I was wondering if you could talk about either M&A or how you're going to deploy the capital because at the time of the conference you didn't have $100 million in cash and you do now, and you're talking about bringing inventory turns down as well, so that would add to your cash balance as well.

Yes. So, I'll just jump in here, Theo. We did have a nice cash build this quarter. I'd also point out that we're roughly on track to double last year's CapEx spend internally here as we look at various growth avenues and investments. As Dan pointed out, we are obviously always on the hunt for M&A. We think that there is a little bit of a slowdown right now in the M&A market given some of these global circumstances and situations that we keep reading about. We do believe that will change, and as we build our cash here, obviously, we're always looking for ways to invest in the future of the business for the long-term. So we think that there will be a use for it. History has shown that. So we do know that there will be a use there for it. But as also Dan called out, we're always looking for ways to improve our capital allocation strategy, so I'll kind of leave it at that.

Okay. In the eMobility segment, are you seeing any particular pockets of strength or growth in there? And could you comment just broadly about if you're seeing any inflation effects in the supply chain?

Yes, I mean, inflation is all around, you know, whatever the wage level, and obviously that doesn't just impact us, it impacts all of our suppliers as well and our customers. So I think inflation is something that everybody's wrestling with when it comes to how to contain it. So as we think about automation and streamlining, there's a big emphasis on ensuring efficient operations. So it is definitely something that we are thinking about and managing as it relates to our numbers. Our facility consolidations will help us manage through some of this inflation, but it is a point of consideration quite frankly through everything we do, whether the customers would pursue the products, we pursue our pricing, and our operations. So it's definitely front and center.

And on the eMobility side, any particular pockets of strength there?

Yes. So on the mobility side, generally, maybe just a general comment on industrial eMobility. These are big-ticket items. They cost more than traditional ICE buses as an example. So as a result of that, we're still seeing overall industry excitement around the future of eMobility. I think some of the nature of our customers we are seeing that are called a little more startup in nature, so as they go through funding rounds, those are points of consideration. But the good thing about our eMobility business is that it's diverse, covering customers from startup mode all the way to mature household names. Overall, I'd characterize it as a very good end market. But like any other market, there are a little bit of challenges at the customer level, but I think for the most part we're bullish on that for sure.

Hi, good morning. Maybe just to close the loop on the eMobility side, I think you said at one point that you expected this revenue to double this year. Is that still the case or are you seeing some macro influencing some of the demand in that market?

Yes, so Jim, last year eMobility sales were in the neighborhood of $20 million for the first nine months of this year we're at $22 million. So probably it will not be doubling this year at this rate. But we've already been seeing, we're already exceeding last year's full-year eMobility sales, so it will not double this year.

Also, I think on the eMobility side, given some of the components, there were a little bit of challenges in getting products out the door earlier this year. So we do expect a nice finish during Q4, but I don't think it will be at double level.

Got it. Sure. Yes, there's a lot of moving parts on the shelves line. Just you are exiting some low-margin business. You have these raw material surcharges that impact. Is there any way to think about what the revenue growth was organically for nine months or Q3? I'm just trying to get a better fix on the top line.

So revenue excluding PBB?

Yes, Farouq, we can discuss this later. I understand that you are reducing some low-margin business. There is an impact from raw material surcharges, but are you experiencing organic growth? Clearly, there is some pressure in the distribution channel, and I believe we all understand that.

Hey Jim, I think because of the long lead times that we're faced over the past 24 months, our pricing that we put in place really has been effective, so we didn't lose out because of price increases. I think going forward that might change as lead times come down. So as I said over the past 24 months, our new strategy, looking at margins and not just taking business for the sake of having business hasn't really hurt us due to the lead times, so most of it is coming from PBB.

Okay, and maybe just moving to the facility consolidation, you gave a little bit of color on some of the early benefits. How do we think about the balance of that rolling out over the course of 2024? Is that expected early in the year or is it going to be spread more evenly over the course of the year?

I think, the way I think about it, Jim, is it's a phased rolling approach. So we started seeing a little bit of benefits in Q2 more in Q3. We expect to see more in Q4. My guess is, if I were just going to hedge a little bit, my guess is there will still be a little bit of cost that dribbles into Q1 next year. But I think largely we expect that this will be behind us in 2023, maybe with a little bit of overhang into next year. But I think for the most part, we've made some pretty good progress here. So yes, I think we'll largely see the benefits of that throughout all over next year.

And just to circle back quickly on your question about the expedite fee revenue, we do now have in the earnings release itself in the non-GAAP tables, GAAP net sales and what the expedite fee revenue is, along with the non-GAAP adjusted net sales. So for the nine-month period, the numbers are noted there. So on that basis year-over-year for the nine-month period it was a $22 million increase in non-GAAP adjusted net sales which was just under 5%.

Thanks, Lynn for pointing that out. And then just in terms of some of the business that you deemphasized, have you put a number to that through the nine months?

In the previous quarter, we mentioned around $9 million. I see this more from a SKU or order perspective. When we receive orders or provide quotes, we set prices suitable for Bel Fuse, but sometimes we may not reach those prices, and we can decide not to proceed. I view this as standard SKU management rather than a significant withdrawal from business. We're mostly past any major pullbacks, and future developments will depend on individual orders. These orders can range from as small as $1,000 to several hundred thousand dollars, so decisions will be made at that detailed level.

Now that's clear Farouq. Thanks for that. And you too, Lynn, I want to clarify one more thing about commercial air. You provided the bookings number, but did you mention what the commercial air revenues were for the quarter? I seem to recall that the revenues from commercial air were $15.9 million in Q2, or was that the bookings number?

No, you're correct. So the commercial air sales in Q2 were $15.9 million. For Q3, they were down a bit, they were $11.3 million for the quarter.

Okay. But generally it sounds like you're still seeing pretty healthy demand in that market.

That's right. So as we mentioned earlier, we did have a record bookings quarter for that end market in Q3, so the bookings for Q3 was $15.7 million.

And I think, Jim, the way I kind of think about these end markets, kind of defense, the ordering patterns and shipping patterns, kind of are a little bit more and more lumpy. So I think that's why I threw, as Lynn noted with the bookings and the conversations we're having with our various customers, this is what gives us that sentiment of positivity on the outlook.

Got it. Thanks very much. Congrats on the quarter by the way.

Thank you.

Good morning, Dan, Farouq, and Lynn.

Good morning, Hendi.

So Dan, I would like to hear your insight into inventory at the customer and distribution across various businesses. We have heard that many companies reported broadening weaknesses in industrials, and I'm wondering how much we should factor that in going forward? And then if you look at Magnetic, can we assume that inventory correction or digestion is at the bottom of the half of market? And then I'm also wondering when we may see a growth recovery in Power Solution and Protection.

Okay, I think we talked more Power Solution and Protection. A lot of it, again, is coming from the Circuit Protection area, and that's a very heavily distribution period business where most customers buy circuits, fuses, and circuits through distribution because of the low price. From everything we understand, people like Arrow, Avnet, Digikey, and Mouser still have to work through their inventory. They really brought in too much inventory and that's their highest level. We hope and believe that most of it should be flushed out by the first or the middle of the second quarter, and we should get back to normal ordering at that point in time. So I would say middle of second quarter next year, everybody's predicting that line from an order process will go back.

Yes, and then maybe just to also kind of supplement that, Dan kind of triggered my memory here. So as a reminder, generally Q2 and Q3 are our strongest quarters, Q1 historically is our weakest quarter, and then Q4 is somewhere in the middle. So the way we kind of look at just the guidance we gave out is kind of the normal cadence of Q4 with some of the holiday patterns.

Yes. And then Farouq, how sustainable is the gross margin at the 35% level now?

Yes, I mean, if you look at it, we know that there are more cost improvements to be done within the business. Magnetics, while sequentially up on sales, is still down on low margins. So we do expect improvements in the Magnetics side of the house. As I think about those two things coupled with the weakness that we do see a little bit of power, as Dan mentioned, and also a little bit of connectivity. So we've yet to hit on all cylinders, right? Our expectation is we can kind of do this in some pockets of weakness. We do think it's sustainable. Now, it doesn’t mean that we may be impacted here and there, sure, but at the end of the day, I think our expectation is at the gross margin level at a consolidated level, we're in the zip code of where we should be.

And then the press release also called out rail application. Would you refresh our memory? Where is the opportunity and where your products are in rail applications?

First of all, the rail business is really quality business, but as we know, rail, I kind of think of it as a step or move from defense in the sense of ordering patterns. The complexity and demanding nature of rail is a business that we've been in for I think over 40 years. This is a great business for us. We've seen more investment coming globally, predominantly out of Europe and Asia, I would say, as they invest in their rail applications. We're seeing increased orders there, and we also have reassigned some more resources to focus on that market. So we're seeing the benefits of that here. I think we started doing that in 2021 or perhaps early 2022 to really focus on that side. In terms of applications, we tend to be on the passenger rail side of the business, and we have various applications through other carts anywhere from lighting application, signaling, and other components. So it's a pretty diverse business product for us. In terms of size of that business...

Yes, so our rail sales in Q3 were $6.4 million. So it represented about 9% of the Power segment.

Got it. Okay, yes. Thank you, Dan, Farouq, and Lynn.

Thank you.

Thank you for joining us today, and we're looking forward to speaking to you next year. Have a good day. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.